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January

DAFs Bring an Investment Angle to Charitable Giving

If you're planning to make significant charitable donations in the coming year, consider a donor-advised fund (DAF). These accounts allow you to take a charitable income tax deduction immediately, while deferring decisions about how much to give — and to whom — until the time is right.

 

Account attributes

A DAF is a tax-advantaged investment account administered by a not-for-profit "sponsoring organization", such as a community foundation or the charitable arm of a financial services firm. Contributions are treated as gifts to a Section 501(c)(3) public charity, which are deductible up to 50% of adjusted gross income (AGI) for cash contributions and up to 30% of AGI for contributions of appreciated property (such as stock). Unused deductions may be carried forward for up to five years, and funds grow tax-free until distributed.

 

Although contributions are irrevocable, you're allowed to give the account a name and recommend how the funds will be invested (among the options offered by the DAF) and distributed to charities over time. You can even name a successor advisor, or prepare written instructions, to recommend investments and charitable gifts after your death.

 

Technically, a DAF isn't bound to follow your recommendations. But in practice, DAFs almost always respect donors' wishes. Generally, the only time a fund will refuse a donor's request is if the intended recipient isn't a qualified charity.

 

Key benefits

As mentioned, DAF owners can immediately deduct contributions but make gifts to charities later. Consider this scenario: Rhonda typically earns around $150,000 in AGI each year. In 2017, however, she sells her business, lifting her income to $5 million for the year.

 

Rhonda decides to donate $500,000 to charity, but she wants to take some time to investigate charities and spend her charitable dollars wisely. By placing $500,000 in a DAF this year, she can deduct the full amount immediately and decide how to distribute the funds in the coming years. If she waits until next year to make charitable donations, her deduction will be limited to $75,000 per year (50% of her AGI).

 

Even if you have a particular charity in mind, spreading your donations over several years can be a good strategy. It gives you time to evaluate whether the charity is using the funds responsibly before you make additional gifts. A DAF allows you to adopt this strategy without losing the ability to deduct the full amount in the year when it will do you the most good.

 

Another key advantage is capital gains avoidance. An effective charitable-giving strategy is to donate appreciated assets — such as securities or real estate. You're entitled to deduct the property's fair market value, and you can avoid the capital gains taxes you would have owed had you sold the property.

 

But not all charities are equipped to accept and manage this type of donation. Many DAFs, however, have the resources to accept contributions of appreciated assets, liquidate them and then reinvest the proceeds.

 

Requirements and fees

A DAF can also help you streamline your estate plan and donate to a charity anonymously. Requirements and fees vary from fund to fund, however. Please contact our firm for help finding one that meets your needs.

 

 

 

Need to Sell Real Property? Try an Installment Sale

If your company owns real property, or you do so individually, you may not always be able to dispose of it as quickly as you'd like. One avenue for perhaps finding a buyer a little sooner is an installment sale.

 

Benefits and risks

An installment sale occurs when you transfer property in exchange for a promissory note and receive at least one payment after the tax year of the sale. Doing so allows you to receive interest on the full amount of the promissory note, often at a higher rate than you could earn from other investments, while deferring taxes and improving cash flow.

 

But there may be some disadvantages for sellers. For instance, the buyer may not make all payments and you may have to deal with foreclosure.

 

Methodology

You generally must report an installment sale on your tax return under the "installment method." Each installment payment typically consists of interest income, return of your adjusted basis in the property and gain on the sale. For every taxable year in which you receive an installment payment, you must report as income the interest and gain components.

 

Calculating taxable gain involves multiplying the amount of payments, excluding interest, received in the taxable year by the gross profit ratio for the sale. The gross profit ratio is equal to the gross profit (the selling price less your adjusted basis) divided by the total contract price (the selling price less any qualifying indebtedness — mortgages, debts and other liabilities assumed or taken by the buyer — that doesn't exceed your basis).

 

The selling price includes the money and the fair market value of any other property you received for the sale of the property, selling expenses paid by the buyer and existing debt encumbering the property (regardless of whether the buyer assumes personal liability for it).

 

You may be considered to have received a taxable payment even if the buyer doesn't pay you directly. If the buyer assumes or pays any of your debts or expenses, it could be deemed a payment in the year of the sale. In many cases, though, the buyer's assumption of your debt is treated as a recovery of your basis, rather than a payment.

 

Complex rules

The rules of installment sales are complex. Please contact us to discuss this strategy further.

 

 

 

Corporate tax reform may prove harder than Republicans expect

Peter R. Orszag

Legislating can be so much more challenging than it seems during an election campaign. That's becoming increasingly clear about Republican promises to repeal and replace Obamacare. And it's about to become clearer on corporate tax reform.

 

Tax reform is a relatively easy concept: Most people favor lowering the tax rate and closing loopholes. The difficulty is in the details.

 

Consider the proposal now before the House of Representatives. It includes a reduction in the corporate tax rate; a one-time lower tax on profits accumulated abroad; an end to the tax deductibility of interest expense, coupled with immediate expensing of investments; and a border-adjustment system that would impose the corporate tax on imports but not exports.

 

The plan has several potentially desirable attributes. It would, for example, effectively eliminate the incentive for companies to shift profits abroad. However, the plan as a whole also has little chance of being enacted into law. Here's why not.

 

The first two components of the House plan are popular and are likely to be enacted in some form: a cut in the corporate rate and a reduced one-time tax on profits accumulated abroad. The latter will likely take the form of “deemed repatriation,” in which the tax is imposed on foreign profits to date, regardless of whether they are repatriated to the U.S. Then any subsequent repatriations of those funds would be free of tax. Among the details that need to be worked out are the tax rate (probably 7-15 percent), whether the tax can be paid over time or must be paid all at once, and how to treat foreign taxes already paid. Such details are the bread and butter of legislative negotiations.

 

What's much harder is changing the current Tax Code with regard to interest payments and introducing a border adjustment. And as those details are examined, we are likely to see the plan shift away from broad, comprehensive tax reform to a much more targeted scheme.

 

Economists and tax scholars have long disparaged the tax deductibility of interest expense, because it leads companies to use debt rather than equity to finance their activities. If one were designing a new tax system from scratch, a decent argument could be made that debt and equity should be treated similarly. The problem is that lawmakers are not designing the system from scratch. The U.S. nonfinancial corporate sector has more than $8 trillion in debt outstanding, debt that was taken on under the assumption that the interest would be tax-deductible. Multiple business models are based in part on that provision. So removing the tax deductibility at this point would wreak varying degrees of havoc on indebted firms, real estate investment trusts, the private equity sector, and many other companies. Whether or not you think it worthwhile to wreak such havoc, legislation producing it would likely be challenging to enact.

 

The same principle applies to the border-adjustment system. Economists and tax scholars generally favor tax structures, like the border-adjustment one, that eliminate incentives for companies to use transfer pricing techniques to shift profits overseas. In the current system, for example, companies have an incentive to reduce U.S. profits by inflating the price paid to a foreign subsidiary, and this practice is very hard to police. Under the border-adjustment structure, the incentive would disappear, because the tax imposed on the import from the foreign subsidiary would offset any benefit.

 

Proponents of the border-adjustment system also argue that any burden the tax imposed on importers would be mostly or entirely offset by an appreciation of the exchange rate, which would reduce the pre-tax cost of the imports. But to many retailers who rely on imports, that offset seems quite theoretical, and they are already ramping up to fight the legislation. It's also unclear whether the border adjustment would comply with World Trade Organization rules. But domestic opposition is likely stop this proposal before it gets as far any international panel.

 

Vague predictions are of little use. So let me make a specific one: Deemed repatriation will be enacted this year, but at the end of 2017, interest on corporate debt will still be a deductible expense and the corporate income tax rate will not be imposed on imports.

 

Peter R. Orszag

Peter R. Orszag is a vice chairman of investment banking at Lazard Freres & Co., and previously served as director of the Office of Management and Budget and director of the Congressional Budget Office.

 

 

Most family businesses lack succession plans

By Michael Cohn

Only 23 percent of family businesses have a robust succession plan in place, according to a new report from PricewaterhouseCoopers, with 46 percent of the family businesses polled saying they are reluctant to pass the business to the next generation.

 

The difficulties of succession planning in family businesses have come into stark relief with the high-profile case of Donald Trump. His decision to give control over his business empire to his sons Donald Jr. and Eric, with the likely continued involvement of his daughter Ivanka, has prompted concerns over whether it is enough to prevent a conflict of interest for an incoming president.

 

In PwC's survey, the reluctance of many family business founders to pass the company to their children shouldn’t be surprising, given how dysfunctional many families can be.

 

“Family businesses are different because you’ve got family dynamics in the ownership and running of the business,” said PwC partner and family business services leader Jonathan Flack. “If you’re a parent passing the business to your children, and you have more than one child, there’s the family dynamic struggle about choosing one of my children to lead the business. Am I de facto pointing out the favorite of the children? Am I being fair to my children? That’s a struggle.”

 

Another problem, he noted, is the business a father or mother started 30 or 40 years ago looks significantly different today. “It’s a complex business world,” said Flack. “They are probably competing in different markets, where before maybe they were competing in one or two markets. To be the leader of that family business, the next generation may not be up to snuff.”

 

A family business founder may struggle with whether to have an individual from the family continue to lead the business or to look outside and bring in a non-family member who has the right skill sets. That can lead to more reluctance to do succession planning, even though the need is pressing for family patriarchs and matriarchs.

 

“There seems to be this tendency where my clients have said, ‘If I were to die, here’s what would happen,’ but ‘if’ is not the operative term here,” said PwC partner and family business survey leader Alfred Peguero. “It’s just a matter of when. I try to make it analogous to when someone goes on vacation. They go on a two- or three-week vacation and there’s all the work and effort that goes into it to have that vacation and have peace of mind. We’re trying to say, ‘What would happen if you went on a vacation and you were permanently on that vacation, and there’s no way for anyone to communicate with you?’ I try to get them to focus a little bit around that, but succession planning seems to be one where there’s some hesitancy.”

 

The group of family businesses polled by PwC expressed different preferences for how they planned to grow the business, although growth in existing markets clearly dominated, with less willingness to make acquisitions or expand to new sectors and countries.

 

The poll encompassed approximately 2,800 businesses this year in 50 countries, according to Peguero, including about 160 participants in the U.S. The majority of them are PwC clients, with $100 million or more in sales.

 

Another issue that has come to the forefront is the choice of passing along the family business to a daughter rather than a son. However, only 64 percent of family businesses surveyed by PwC said females and males in the next generation would be considered equally for leadership positions.

“We are seeing progress, which is a good thing,” said Flack. “If you look at the C suite roles in family businesses, based on who responded to us, about 10 percent of the C suite roles are with females, as compared to the Fortune 1000 and Fortune 500, where you’ve got only about 5 percent of those roles.”

 

He believes cultural changes within the last 10 to 20 years have been far more favorable for females in the workplace, including at his own firm, PwC. “Our firm has been in business since the 1850s, and I often look at how long it took for our firm to have this solid increase in the advancement of females not only in the workplace at PwC, but then also in our leadership positions,” said Flack. “I think we are much like those older family businesses in that it took a while to matriculate those individuals to leadership positions, but it also took a while to breed that into our culture. The older family businesses are taking more time to change culture, change their environment and points of view, as compared to some of the younger businesses.”

 

PwC also found that 21 percent of the family businesses polled ranked “being more innovative” as a very important business goal, although 67 percent of them prioritized “ensuring the long-term future of the business.”

 

“We think that family businesses do an excellent job of the day-to-day execution,” said Flack. “They’re nimble, they’re efficient, they respond to customers’ needs. The other thing we think they do really well is the long-term orientation they have on the business. They’re very vision oriented, they’re very mission oriented, they’re very involved in their communities, and they look at investment over a very long-term horizon versus something that’s more quarter-to-quarter based or just within a year or two. I think the piece where they have a blind spot is that midterm strategy, that two- to five- or seven-year period. It’s very important to really formalize a succession planning strategy.”

 

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

 

 

Remote sellers should brace for surge of sales tax reporting laws

By Jennifer McLoughlin

The new year will ring in a new chapter in the burgeoning battle over state remote sales taxation with a wave of new notice and reporting laws — but questions remain on how remote retailers can manage the potential legislative onslaught.

 

In the wake of the U.S. Supreme Court’s turning down an appeal challenging Colorado’s 2010 notice and reporting regime, many expect that states will regard the ruling as carte blanche to adopt similar statutes (Direct Mktg. Ass’n v. Brohl, 2016 BL 411370, U.S., No. 16-267, petition for certiorari denied Dec. 12, 2016).

 

The Colorado statute (Colo. Rev. Stat. Section 39-21-112.3.5) requires remote retailers not collecting sales tax to report in-state sales to the Department of Revenue and notify customers of their use tax obligations. The law remains under an injunction, and it remains unclear when state officials will seek to lift it.

 

In the meantime, remote sellers must contend with yet another state strategy to capture revenue lost to e-commerce. The Centennial State’s law was the first of its kind, and already became a model for a small contingent of states that have adopted reporting regimes.

 

More state lawmakers are expected to rally behind 2017 legislative proposals mirroring the Colorado measure, with Alabama, Kansas, Nebraska and Utah already announcing plans to push new laws.

 

And as a new patchwork of reporting rules unfurls, there are concerns that ambiguous requirements and multiple mandates will add to businesses’ administrative burdens — not to mention consumers.

 

Susan Haffield, a Minneapolis-based partner with Big Four firm PricewaterhouseCoopers LLP, said, “There is a lot of devil in the details, which, from my perspective, haven’t been ironed out with respect to these types of laws.”


More to follow leader

Even before the DMA denial, some states have recently jumped on the reporting regime bandwagon, including Oklahoma, which implemented its own consumer reporting measure that went into effect in November. Louisiana crafted a Colorado-style law, requiring both consumer notification and annual reporting to the revenue department, so long as the remote retailer generates more than $50,000 from annual in-state sales. The law goes into effect July 1.

 

H. 873 in part sets forth Vermont’s consumer notification requirements — but veered away from mandating disclosure to state tax authorities. However, while signed into law May 25, the notification mandate doesn’t take effect until the earlier of July 1, 2017, or the first day of the first quarter after Colorado implements its reporting regime.

 

“I don’t think it’s a big shock to anyone that most states are eager to slay this problem and when one state is successful, we all tend to copy that approach,” said Alabama Commissioner of Revenue Julie Magee. “I wouldn’t be surprised to see a version of a reporting bill in at least a half a dozen states or more in the coming months.”

 

During the MTC’s Executive Committee session, Magee announced Alabama's plans to push for a reporting regime like that of Colorado.

 

Meanwhile, many states continue to pursue different tax strategies for online retailers that may not incorporate reporting mandates. Virginia Gov. Terry McAuliffe announced plans to propose legislation imposing collection obligations on remote vendors with in-state warehouses or distribution centers. Other states are expected to advance regimes that set forth tax collection obligations based on a threshold of in-state sales, such as the economic nexus regimes that have triggered litigation in Alabama and South Dakota.


Has Colorado’s challenge concluded?

The path to the Supreme Court was paved by a commerce clause challenge to Colorado’s law. However, the dispute originated with several constitutional objections, including claims under the First Amendment and privacy rights.

 

Given that the U.S. Court of Appeals for the Tenth Circuit narrowly resolved only the Commerce Clause issues, the next steps for Colorado are unclear. An injunction enjoining enforcement of the reporting regime remains in effect, so the state could seek an order dissolving the injunction.

Robert Goulding, a communications specialist for the Colorado DOR, said, “We are aware of the decision and are evaluating our next steps for Colorado.”

 

The procedural uncertainty leaves many questioning when remote retailers must start complying with the notice and reporting requirements — not only in Colorado, but also in Vermont. Retailers might be obligated to abide by Vermont’s law before July 1 should Colorado move forward with its regime.


Complications with compliance

In the meantime, uncertainty remains over the specifics and scope of remote retailers’ obligations under these regimes.

 

For example, in addition to the annual reports, Colorado’s law requires remote retailers to provide customers with notifications of their potential use tax obligation at the time of each transaction. However, Haffield explained that there are questions regarding “what constitutes that notice and where should they put it.”

 

“Often, the communication with customers at the time of the transaction occurs only electronically,” she said. “Reprogramming that communication with the customer to provide that notice and how to do that, I think that’s going to be somewhat costly for remote sellers.”

 

Another consideration derives from gifts purchased in one state for delivery in another state, leaving open the question of whether remote sellers should report to the purchase state or the delivery state — or perhaps neither.

 

“More than anything, even if a state has rules, is being able to configure your reporting system to take into account when you’re supposed to report and when you’re not,” Haffield said.


Prepping for patchwork

As more reporting statutes and regulations surface in states, the absence of a uniform standard could complicate retailer compliance.

 

“There’s no template of what this law is,” said Matthew Walsh, vice president of tax for Sovos Compliance. Discrete provisions among state laws — defining the data required, reporting format and delivery mode — could require retailers to generate a separate report for every jurisdiction.

 

While third-party software can facilitate compliance, retailers will need to consider the state-specific requirements and whether their internal systems are equipped to collect and provide the requisite data.

 

Walsh said the ease of reporting will depend on several factors, including, “What’s the system currently doing for the seller? What kind of data do they have? What kind of data do they need to capture? If they need to bolster that, can they easily? And then, how easy will it be to extract that needed data back to the government?”


Retailer resistance

However, some retailers aren’t embracing reporting regimes without a fight. Critics of the Colorado law have expressed disappointment with the Supreme Court’s decision not to hear the so-called tattletale reporting case — and are calling on Congress to intervene.

 

“Remote sellers must make their voices heard,” said Hamilton Davison, president and executive director of the American Catalog Mailers Association, in a Dec. 12 statement after the DMA denial. “They should let policymakers at the federal and state level know that laws like these put an unfair burden on businesses and put personal privacy at risk while bringing government into the home and family.”

 

Consumer trust in catalog and e-commerce merchants is undermined “by requiring remote sellers to report to state tax collectors on the buying habits of their customers, including health care products, apparel or other sensitive items,” he added.


Losing digital dollars

On the other hand, a modern marketplace increasingly defined by e-commerce continues to take a toll on states’ sales tax bases.

 

Constraints on taxing authority over remote retailers derive from the Supreme Court’s 1992 decision, Quill Corp. v. North Dakota, 504 U.S. 298, which permits states to impose sales and use tax obligations on only those vendors with an in-state physical presence. However, many consider this an antiquated, pre-Amazon standard that didn’t contemplate digital commerce.

 

Efforts to capture online tax dollars have included affiliate and click-through regimes, and more recently, economic nexus thresholds. Notice and reporting mandates are just another arrow in cash-strapped states’ quivers.

 

Magee explained that research recently presented by Joe Garrett, Alabama’s deputy co-commissioner of revenue, spotlights a tax system unable to keep up with the modern economy, showing: 

  • Only one-third of the economy is taxed with sales tax, whereas it was once two-thirds of the economy.
  • In the 1960s, Alabama collected $2 of sales tax for every $1 of income tax. The state now collects 66 cents for every $1 of income tax.

 

“Because of this, change is inevitable and unstoppable,” Magee said. “How else will we fund essential government services?”


Calming consumers

As states and remote sellers start navigating the new laws, consumers likewise will be attempting to make heads or tails of their obligations.

 

Where out-of-state sellers have disseminated consumer notifications in select states, Haffield explained that some remote sellers released the notifications in staggered batches to manage the increased volume of customer calls. States, too, will see an uptick of calls from concerned citizens questioning whether they have to pay tax on transactions and how they should pay the tax.

 

Haffield noted that it is an open-ended question whether remote sellers must report transactions that aren’t taxable under state laws — so that consumers may find themselves in a position where they are determining whether the transactions are taxable.

 

Difficulties will increase “without a strong education program by each of the states to tell its citizens what to do when receiving these notices,” she said. “The educational efforts that I think will be needed may make it more difficult for the states and remote sellers than just collecting the tax itself.”


Compelling collection?

While the notice and reporting regimes are cast as non-tax laws, many suggest they encourage retailers to collect and remit instead.

 

“When you look at the cost benefit of the use tax reporting, for the states, I think if they enact the law, their hope will be that more retailers would rather collect the tax and they’ll pick up retail sales tax collection versus a lot of tax reporting,” Haffield said, noting that states likely don’t have sufficient resources to process all use tax information.

 

However, “there will be a lot of sellers who don’t do that,” she added. “And I think states are going to have to have some kind of a system in place to deal with the law if they do enact them.”

For remote retailers, software companies like Sovos Compliance offer a platform to navigate varying state tax bases and rates — and generally provide different technology catering to different types of businesses. For example, Amazon-size companies likely have needs distinct from smaller merchants. Or industries dealing in complex products, such as pharmaceuticals, may require a specific level of software sophistication.

 

“They should all do the same, they should all calculate the taxes and product taxability at the location where that product’s being sold,” Walsh said. “But there are some products that have been designed to support larger enterprises, so their software might have more complex functions than a smaller business would need.”


Small sellers’ disadvantage

However, expenses and personnel demands may deter smaller vendors from investing in a software platform for tax collection.

 

Everett E. Gallagher Jr., senior vice president and treasurer for Abercrombie & Fitch Co., said that the company collects tax on all online purchases in every state — and has done so for years.

 

The company uses the Vertex Indirect Tax O Series, which required an initial investment of money and time to configure the technology and set up the interface between Abercrombie & Fitch’s internal system and the Vertex system. And although sales tax compliance is predominantly software-supported, Gallagher explained that fiscal and IT resources are required to keep pace with software upgrades and sustain the systems’ interface.

 

“I feel bad for the small mom-and-pop shops,” Gallagher said. “Because if you’re doing limited sales, trying to put those systems in and incur the costs, that becomes an administrative burden.”

 

Jennifer McLoughlin

Jennifer McLoughlin covers state and local tax issues in all 50 states and the District of Columbia for Bloomberg BNA.

 

 

 

SEC awards $5.5 mn to whistleblower

By Daniel Hood

The Securities and Exchange Commission announced that it had awarded more than $5.5 million to a whistleblower.

 

According to the SEC, the whistleblower directly reported critical information to the commission about an ongoing scheme at their workplace, and that led to a successful enforcement action that ended the scheme.

 

Neither the whistleblower nor the company was identified.

 

“Whistleblowers play a key role in bringing wrongdoing to the SEC’s attention, and this whistleblower helped prevent further harm to a vulnerable investor community by boldly stepping forward while still employed at the company,” said Jane Norberg, chief of the SEC’s Office of the Whistleblower, in a statement.

 

SEC enforcement actions from whistleblower tips have resulted in more than $904 million in financial remedies. The whistleblower program has now awarded approximately $142 million to 38 whistleblowers since issuing its first award in 2012. 

 

Daniel Hood

Daniel Hood is editor-in-chief of Accounting Today and Tax Pro Today, and has covered the tax and accounting field for over 20 years.

 

 

 

IRS beefs up security for tax season launch

By Michael Cohn

IRS Commissioner John KoskinenBloomberg News

 

The Internal Revenue Service and its partners in the tax preparation industry are improving their security measures ahead of the January 23 start of tax season.

 

The IRS assembled representatives from state tax authorities, accountant organizations, tax software developers and tax preparation chains to talk about its Security Summit efforts Thursday.

“We have new safeguards in place for 2017 to help stop identity thieves, and I want to thank all of our Security Summit partners for the critical work that they have done to protect taxpayers and the tax system,” said IRS commissioner John Koskinen during a conference call with reporters Thursday.

 

Late last year, the Summit leaders expanded their safeguards for taxpayers in the upcoming tax season. The focus will be on “trusted customer” features to help ensure the authenticity of taxpayers and tax returns before, during and after a return is filed. The extra protections will build on the 2016 successes that prevented fraudulent returns and protected tax refunds. Last year saw a 50 percent reduction in the number of affidavits of taxpayer identity theft filed with the IRS, or around 275,000 taxpayers.

 

“The private sector tax industry is critical to the nation’s filing season and the security of taxpayer data,” said Koskinen.

 

Among the extra measures are data elements in the tax software to help authenticate taxpayers and fend off identity thieves.

 

“My members are getting used to their new software programs as we speak,” said National Society of Accountants executive vice president John Ams. “There will be some additional data elements in the background on their programs that they are going to need to get used to. Not that they’ll see them, but the software will operate in the background to make sure that their system is secure.”

The software will include some extra measures of protection. “One of the new features will be that the system will log out if they’re not working on it for a period of 30 minutes, so they will no longer have the opportunity to leave their computer on with client data while they are out of the office doing other things,” said Ams.

 

He noted that the IRS and its industry partners have been working hard to combat identity theft and fraudulent returns. “The tax professional community is also taking steps to assist in this effort,” said Ams. “The nation’s biggest tax professional organizations have been taking part in the summit, and we have been working together to help tax professionals understand what they need to do to protect the sensitive client data they handle. We are also working with other summit participants and the IRS Electronic Tax Administration Advisory Committee to reach out to those preparers who may not be a member of any organization to encourage them to take steps to keep their taxpayer files safe from theft. We are also reaching out to taxpayers to help them avoid being victimized by unscrupulous tax preparers. During this tax season, more than half of the tax returns filed will be professionally prepared. All of us in the tax community urge every taxpayer to make sure they obtain solid professional and ethical tax assistance. Taking some commonsense steps when choosing a preparer can help. You can check your preparer’s professional credentials. Check their history on the IRS website. Once a return is prepared, review it before signing it. Make sure that any refund is directed to the taxpayer’s address and not someone else’s. And never sign a blank tax return.”

 

Intuit chairman and CEO Brad Smith said they were working together collectively as an industry. “We’re providing the training to the tax professionals,” he said. “We have online support as well as phone support if they have questions, and they collectively are signed up with us to make sure that we’re making the tax system safe. We’re also trying to help them continue to be productive at a very busy time of year for them.”

 

Smith said Intuit and its partners are providing some commonsense tools and techniques to tax professionals and is available if they have any questions.

 

“The fight against tax fraud is a team sport, and we are all committed to playing our part,” said Smith. “This includes educating taxpayers and tax professionals about what they can do to protect their own online identity. The Security Summit process continues to make great strides in reducing the impact of tax refund fraud, but Americans still fall prey to cybercriminals. In many cases, there are some common sense actions that you can take to safeguard your personal and your financial information.”

 

He suggested installing antivirus software on computers and keeping all software, including web browsers, up to date. Taxpayers and tax professionals should use strong passwords with a combination of upper and lowercase letters, numbers and symbols. Users should create separate passwords for each of their online accounts, Smith recommended. They should also watch out for phishing scams from fraudsters masquerading as legitimate businesses or the IRS. They should protect their mobile devices, using their phone’s auto-lock feature. In addition, they should be careful what they post on social media and avoid sharing too much personal information that could be used by criminals, such as birth dates and birth places.

 

H&R Block president and CEO Bill Cobb pointed to the continuity of the tax business each year. “One of the things about our industry and the experience of our tax professionals is they come back every tax season knowing things they have to adapt to or train for, and we’re certainly ready on our end,” he said. “I think most professional tax preparers are the same, in that they’re ready. I think the last thing a tax preparer wants is a client who becomes an identity theft victim, so they’re compliant with all the new rules that have come in.”

 

Since the Security Summit first met over a year and a half ago, it has put in place several new protections for this tax season, among them e-file certification standards and common reporting procedures, Cobb noted. “To bring it all together, the Information Sharing and Analysis Center is now operational, which is a key achievement,” he said. “The sum effect is industry is now sharing more data to help verify the identity and authenticity of who is filing the tax return. This effort means that the tax system is safer for everyone: taxpayers, the government and the private sector. But as we all know, the fraudsters remain adaptive. We must keep our guard up and continue to evolve to meet new threats. Speaking for H&R Block, I know that we have worked hard to ensure our digital product continues to employ stringent industry measures to protect our clients’ information, such as bank-level encryption technology and layers of required authentication. We also have tax identity shields at H&R Block, which assist taxpayers in the prevention and/or recovery from tax identity theft.”

 

The IRS plans to use the new “trusted customer” process to help authenticate taxpayers, with the help of tax professionals. “Trusted customer as a general matter is one of the great advantages of the Security Summit,” said Koskinen. “That is, tax professionals and tax preparers obviously have a better line of sight to their clients and in many cases will be able to provide information that they know and are confident this is a trusted taxpayer and a trusted preparer. And our ability to have that information will allow us to speed the review of questionable returns through the process faster, so it is an important data element. It will not require anybody to go out of their way to try to determine who is trusted. A lot of times, they’ll know if the taxpayer is pulling the W-2 information directly from their employer. If you’re able to do that, you’re more likely to be a real employee as opposed to someone in a foreign country.”

 

Tax Season and Refund Delays

The IRS anticipates more than 153 million tax returns will be filed this year. Taxpayers will have until Tuesday, April 18, 2017, to file their 2016 tax returns and pay any taxes they owe, thanks to the Emancipation Day holiday in Washington, D.C., that Monday.

 

However, taxpayers and tax practitioners should brace for delays on refunds for tax returns that claim either the Earned Income Tax Credit or the Additional Child Tax Credit. The IRS expects to issue more than nine out of 10 refunds in less than 21 days. But the Protecting Americans from Tax Hikes Act, or PATH Act, requires the IRS hold refunds on tax returns claiming the EITC or the ACTC until mid-February to give the IRS more time to help detect and prevent tax fraud.

The IRS plans to begin releasing EITC and ACTC refunds starting February 15, but cautions taxpayers the refunds probably will not start showing up in bank accounts or on debit cards until the week of February 27. It will take extra time for the refunds to be processed and for financial institutions to accept and deposit the refunds to bank accounts, the IRS cautioned. Many financial institutions do not process payments on weekends or holidays, which can affect when refunds reach taxpayers. For EITC and ACTC filers, the three-day holiday weekend involving President’s Day could also affect the timing of their tax refunds.

 

Koskinen encouraged taxpayers and tax professionals not to hold back on filing the tax returns, however. The IRS will continue to process the returns, even if it won’t be allowed to issue the refunds until February 15.

 

“Taxpayers claiming the EITC or ACTC should file as soon as they have all of the necessary documentation together to prepare an accurate return,” he said. “In other words, file as you normally do.”

 

Cautions for Taxpayers

Koskinen also had a special caution for taxpayers who use Individual Taxpayer Identification Numbers, or ITINs, instead of Social Security numbers on their tax returns. “Beginning this week, any ITIN not used at least once on a tax return in the past three years will no longer be valid for use on a return,” he said. “In addition, ITINs with middle digits 78 or 79 also expired as of January 1st. So if you have an expiring ITIN and need to file a return in 2017, it’s extremely important to renew your ITIN as soon as possible. Here’s why it’s critical not to delay: It can take seven weeks or more from the time you send in Form W-7, the renewal application, for the IRS to process the application and notify you about your status. Those who fail to renew before filing a tax return could face a delayed refund, and they may also be ineligible for some important tax credits. So I would urge people to file that renewal application right away, to avoid any delays. For more information, and to get answers to frequently asked questions, visit our ITIN page on IRS.gov.”

 

He also had an important reminder for taxpayers who file electronically with their own tax software. “If you’re changing tax software products this filing season, make sure you have a copy of your prior-year return on hand,” he said. “You may be asked to enter your 2015 adjusted gross income. This helps verify your identity before you e-file. We’re no longer offering the Electronic Filing Personal Identification Number, or e-File PIN, as an alternative. So, plan ahead and locate last year’s return.”

 

Trump Administration Plans

Koskinen was also asked by reporters about his expectations for staying on during the incoming Trump administration. Congressional Republicans are still upset with Koskinen over the IRS’s slow handling of applications for tax-exempt status from conservative groups, although he avoided an effort last year by the House Freedom Caucus to start impeachment proceedings against him. However, Koskinen has had dealings with Trump going back to the mid-1970s, when as an attorney he helped arrange the sale of the Commodore Hotel in New York to the budding real estate magnate.

 

He told reporters on the call that he has had productive talks with the Trump transition team and urged them to avoid a proposed hiring freeze during tax season.

 

“We’ve had very positive discussions with the transition team,” said Koskinen. “This week they’ve come back and talked with specific operating divisions to find out more details. They’ve been very straightforward, very factual, very productive discussions, in which there have been no indications that anybody has any axes to grind or any particular focuses, other than trying to determine how the IRS operates across the sweep of its activities and what it takes to keep it operating successfully, so we’ve been very pleased with those discussions. We’ve made it clear to the transition team we’re delighted to provide any information that they think would be helpful to them in making sure that the transition is as smooth as it is. In some ways, as I’ve said both publicly and to the transition team, we’re an easier transition than in some areas because we don’t do tax policy. We are actually tax administration. So to the extent that there’s a lot of discussion about tax reform and various forms of that, we don’t have a stake in that other than—as I’ve said and we’ve made that clear as well—we have a great interest in making sure whatever changes you make in the tax code, are administrable. We’re happy to provide technical assistance, now and into the future, both with the new administration and on the Hill, to look at the technical administration issues around any tax reform. So there’s no pending policy change that I would expect with the IRS. There has been no discussion or indication one way or another as to what the president might do. My term runs out next November, but as I’ve said all along I serve at the pleasure of the president, so at this point my plan as it always has been is to keep paying attention to the business and be here until next November.”

 

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

 

 

 

One-year countdown on offshore funds begins

By Roger Russell

Jan. 1, 2017, began the final countdown for paying taxes on funds tucked away offshore in deferred-compensation plans. On Dec. 31, 2016, Code Section 457A put to an end to the strategy of deferring compensation in tax-advantaged jurisdictions offshore.

 

While the legislative initiatives of the 115th Congress that began today may bring some certainty to the question of repatriation of money held overseas, one thing is already certain, and it’s not the one-time tax holiday that President-elect Donald Trump talked about during the campaign. It’s a tax aimed specifically at the offshore deferred compensation arrangements that have been accumulating overseas, many from the 1990s. Changes to the Internal Revenue Code were introduced in 2008 as part of the Emergency Economic Stabilization Act. While some have brought funds home already, others will have major planning decisions to make in the coming year when billions of dollars held offshore face taxation, according to Withers Bergman partners Jim Brockway and N. Todd Angkatavanich.

 

Code Section 457A requires income recognition no later than 2017 on certain pre-2009 offshore deferred compensation arrangements, regardless of whether such income has actually been received by the fund principal, unless the arrangement continues to be subject to a substantial risk of forfeiture.

 

The aim behind the code section was “not to allow U.S. persons to defer their otherwise taxable income by using a tax-indifferent party,” said Brockway. “The accruals that had run up by the end of 2008 were not taxed then, but will be taxed on the full principal balance by the end of 2017. Fund managers have been aware of the change, but most decided to wait on the sidelines for new legislation to postpone it. However, there’s nothing in Trump’s proposals that would do this, so the day of reckoning is here, or will be at the end of the year.”

 

The recognition of income applies regardless of receipt, he indicated. “It’s just taxable, so virtually everyone that has not received their interest in the fund by now will be taking it into income and receiving dollars, because they will need the dollars to pay the tax,” he said.

 

 “Because many of these arrangements were used to defer tens of millions, if not hundreds of millions, from current income taxation, 2017 presents a substantial liquidity issue,” said Angkatavanich. “There are massive tax and liquidity issues with more than $100 billion to be recognized. Although there are a number of ways to approach it, there’s no magic bullet.”

 

“The balances in these arrangements are enormous,” noted Brockway. “They will be taxed as ordinary income, so in a high income tax state, the tax on $100 million could approach $50 million. Most approaches involve some sort of charitable planning to offset the income. Assuming a cap on itemized deductions doesn’t come into play, there are various types of split-interest charitable trusts that could provide payments to a charity for a number of years, and what is left comes back to you or to whomever you want.”

 

A charitable lead annuity trust, or CLAT, is one of these, according to Angkatavanich. “Structured correctly, a CLAT can be funded with assets that appreciate significantly during the charitable term. This will effectively address philanthropic goals by providing an up-front or ‘lead’ stream of annuity payments to a charity. It also achieves income tax goals by generating corresponding charitable deductions, and achieves transfer tax goals by passing all assets remaining after the annuity term to the remainder beneficiaries, free of gift or estate tax,” he said. “If you can get your interest in the CLAT to grow, you can get what you need to pay out of the CLAT and have the balance grow to pass on to your kids or go back to you.”

 

Roger Russell

Roger Russell is senior editor for tax with Accounting Today, and a tax attorney and a legal and accounting journalist.

 

 

 

GOP readies swift Obamacare repeal with no replacement ready

By Bloomberg News

The first major act of the unified Republican government in 2017 will be a vote in Congress to begin tearing down Obamacare.

 

But the euphoria of finally acting on a long-sought goal will quickly give way to the reality that Republicans—and President-elect Donald Trump—have no agreement thus far on how to replace coverage for about 20 million people who gained insurance under the health-care law.

 

“They haven’t come to a consensus in the House and the Senate about the possible replacement plans,” said Douglas Holtz-Eakin, a conservative economist and former adviser to Senator John McCain’s 2008 presidential campaign. “They don’t know Point B.”

 

Demonstrators outside the Supreme Court in advance of the court's rulling that the ACA was constitutional.

 

Republicans are debating how long to delay implementing the repeal. Aides involved in the deliberations said some parts of the law may be ended quickly, such as its regulations affecting insurer health plans and businesses. Other pieces may be maintained for up to three or four years, such as insurance subsidies and the Medicaid expansion. Some parts of the law may never be repealed, such as the provision letting people under age 26 remain on a parent’s plan.

 

House conservatives want a two-year fuse for the repeal. Republican leaders prefer at least three years, and there has been discussion of putting it off until after the 2020 elections, staffers said.

 

In nearly seven years since Obamacare passed, dozens of comprehensive health-care alternatives have been introduced, but none has gotten off the ground. The most developed plan so far is legislation by House Budget Chairman Tom Price of Georgia, Trump’s nominee to run the Department of Health and Human Services, which he introduced in every Congress since 2009. It had 84 cosponsors in the House.

 

But that bill—centered on age-based refundable tax credits to buy insurance—didn’t receive a hearing in committee, nor was it included in Price’s budget that was adopted by the House last year.

 

If Republicans stick together, repeal could happen quickly. The Senate plans to move first on a nonbinding budget resolution instructing committees to draft repeal legislation, with the House approving it next. The resulting proposals would be sent for final votes under a process known as reconciliation, which is used to bypass the 60-vote threshold in the Senate.

 

Key players tasked with executing the plan will be Senate Finance Chairman Orrin Hatch of Utah and Health Chairman Lamar Alexander of Tennessee, and on the House side, Ways and Means Chairman Kevin Brady of Texas and incoming Energy and Commerce Chairman Greg Walden of Oregon.

 

Replace with What?

To cushion the political blow of upending the system, party leaders are putting out a stream of statements portraying Obamacare as collapsing on its own.

 

But the Department of Health and Human Services reported that signups reached 6.4 million by the Dec. 19 deadline, an increase of 400,000 over the previous year’s number at this time. Earlier, President Barack Obama said that more than 670,000 Americans signed up for coverage on Dec. 15, "the biggest day ever for Healthcare.gov."

 

“The overarching challenge is that the Affordable Care Act is the status quo, and disrupting the status quo in health care is always controversial,” said Larry Levitt, a health policy expert at the Kaiser Family Foundation and former adviser to President Bill Clinton’s health-care efforts. “There are so many moving pieces to this effort involving lots of money and lots of interest groups. So piecing together the votes is daunting.”

 

Trump and House Speaker Paul Ryan of Wisconsin have been vague on what they want to see, but both released blueprints calling for expanding the use of tax-advantaged Health Savings Accounts, allowing the sale of insurance across state lines and turning Medicaid over to states. Republicans are seeking recommendations from governors and industry leaders on what to do.

 

“We need to put patients in charge of their health-care choices with a free-market solution that increases access and lowers the overall spiraling costs of health care, which Obamacare did nothing to address,” Republican Senator David Perdue of Georgia, a close Trump ally, wrote Thursday in an op-ed for the Daily Caller, a conservative website.

 

Translating slogans and white-papers into legislation will create problems. Undoing Obamacare would increase the number of non-seniors who are uninsured by 24 million over a decade, according to the Congressional Budget Office. Republican aides privately acknowledge that would give Democrats a potent political weapon to fight their efforts, but say their focus will be on lowering costs and expanding choice.

 

Trial and Error

Unifying the party may require trial and error, said Rodney Whitlock, a former health policy aide to Republican Senator Chuck Grassley of Iowa, adding that Ryan will be a key figure to watch. He may have to get the Congressional Budget Office to provide estimates for how multiple proposals would affect the budget deficit, Whitlock said.

 

“That’s the pathway to get his folks to understand the cost and coverage consequences of their policy decisions,” Whitlock said. “That’s not going to be easy, but I don’t see how he gets his conference to consensus without an exercise like that.”

 

Some Republican aides say they may pursue a replacement through a series of small bills as opposed to one big measure. Leading Republicans such as Senate Majority Whip John Cornyn of Texas have said they want Democratic buy-in on a replacement plan. Breaking a filibuster would require the support of at least eight Democrats.

 

Obamacare continues to be viewed unfavorably by Americans, but the politics of undoing the law are complicated. A Kaiser Family Foundation poll after the election showed 26 percent want to repeal it, while 17 percent want to scale it back. Nineteen percent want to move forward with implementation and 30 percent want to expand it.

 

‘Bring It On’

Democrats have made clear they won’t go along with Republican attempts to repeal Obamacare. Some are taunting the GOP as it attempts to write a replacement.

 

“Bring it on,” incoming Senate Democratic Leader Chuck Schumer of New York said this month. “They don’t know what to do. They’re like the dog that caught the bus.”

 

Several of the law’s provisions are popular, most notably the regulations prohibiting insurers from denying coverage or raising costs on people with pre-existing conditions. And of the 14 states with the largest percentage of non-elderly people with pre-existing conditions in 2015, Trump carried 12, according to a Kaiser Family Foundation study released last week. He also got one electoral vote in Maine, the 13th state in that group.

 

Congressional Republican aides say they’re likely to soften those rules by limiting their protections to people who maintain continuous coverage.

 

“The pre-existing condition provisions in Republican proposals are less protective,” Levitt said. “With fewer protections you could piece together other mechanisms to keep the market stable.”

 

Trump has proposed high-risk pools to cover sick uninsured people, but financing them will be a challenge. A 2010 estimate in National Affairs by conservative health-care experts Tom Miller and James Capretta pegged the cost at $150 billion to $200 billion over a decade to insure up to 4 million people; House Republicans have been reluctant to spend anything close to that.

 

Funding Challenges

Republicans are considering setting up a fund to address the cost, perhaps with savings from repealing Obamacare’s subsidies.

 

The funding challenges are substantial. Repealing the law would increase the deficit by $353 billion over a decade, or $137 billion under favorable macroeconomic assumptions, according to the Congressional Budget Office.

 

As they chart the path ahead, Republicans are trying to calm fears.

 

“The new big lie, after ‘if you like your health care plan you can keep it,’ is that 20 million Americans will lose their health care. That’s simply not true,” Brady told reporters Dec. 15. “Republicans will provide an adequate transition period to give people peace of mind that they will have those options available to them as we work through the solutions.”

 

- Sahil Kapur, Bloomberg News

 

 

 

IRS proposes and issues new rules for gambling winnings

By Michael Cohn

The Internal Revenue Service and the Treasury Department have proposed new rules for withholding and reporting on gambling winnings from horseracing, dog races and jai alai pari-mutuel betting, and finalized regulations for reporting on bingo, keno and slot machine winnings.

 

The proposed regulations on pari-mutuel betting affect both payers and payees of gambling winnings subject to withholding under Section 3402(q) of the Tax Code. The 31-page document, entitled “Withholding on Payments of Certain Gambling Winnings,” resulted largely from the efforts of the National Thoroughbred Racing Association, accomplishing goals the NTRA initiated over two years ago, according to the association. The NTRA said it met with officials from the IRS and the Treasury Department. Horseplayers also visited Washington to lobby regulators. The effort also included grass roots campaigns and direct contact involving thousands of members of the horseracing industry, including bettors, along with involvement by members of Congress, governors and other elected officials.

 

The proposed rules clarify “the amount of the wager” to include the entire amount bet in a specific pari-mutuel pool by an individual—not just the winning base unit as is the case today—so long as all wagers made into a specific pool by an individual are made on a single totalizator ticket if the wager is placed onsite. The proposed regulations would produce the same results for Advance Deposit Wagering customers and would not affect how those wagers are now made. The NTRA said the proposed regulations would have a positive impact on a significant percentage of winning wagers, particularly those involving multi-horse or multi-race exotic wagers, and result in tens of millions of dollars in additional pari-mutuel churn.

 

The proposed rules will go through a 90-day comment period and they could conceivably be in place prior to the 2017 Triple Crown. During a similar comment period last year that attracted nearly 12,000 comments, the NTRA set up a convenient way for industry stakeholders to encourage the IRS and Treasury to enact proposed regulations, and it plans to do the same next week.

 

In its rulemaking document, the Treasury and IRS cited a number of examples provided by the NTRA as reasons for the need to modernize the regulations. The document also referred to the many comments submitted by individuals in support of the proposed changes.

 

“This is a tremendous step forward in our ongoing efforts to modernize pari-mutuel regulations to accurately reflect today’s wagering environment,” said NTRA president and CEO Alex Waldrop in a statement Thursday. “The NTRA remains thankful to everyone who has engaged in this process, including numerous industry stake holders, horseplayers, members of Congress, governors and other elected officials, especially Congressmen John Yarmuth, D-Ky., and Charles Boustany, R-La., who led the congressional effort. A unified message has gotten us to this point, and we encourage everyone to continue to work through the channels we will be establishing as we seek to push these proposed regulations across the goal line.”

 

The complete Treasury and IRS rulemaking document is posted on NTRA.com here.

 

Bingo, Keno and Slot Machine Regulations

The IRS also issued final regulations Friday regarding the filing of information returns to report winnings from bingo, keno, and slot machine play. The rules update the existing requirements in Section 6041 of the Tax Code pertaining to the filing, form and content of these types of information returns. They also permit an additional form of payee identification and offer an optional aggregate reporting method. The final regulations affect people who pay winnings of $1,200 or more from bingo and slot machine play, $1,500 or more from keno, along with the recipients of those payments.

 

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

 

 

 

The importance of sustainability accounting and reporting in assessing a firm: A student’s perspective

By Tracey J. Niemotko

 

Janice Nunziato displaying her research poster on sustainability accounting and reporting at the Mount Saint Mary College "iRoc" independent research on campus event.

 

Accounting students have the arduous task of learning how to prepare and analyze financial reports. Like other users of financial data, they may wonder if the numbers alone are enough to evaluate a firm.

 

From the perspective of millennials, issues regarding quality of life, the environment and social responsibility are important considerations above and beyond the “bottom line” in their overall perspective and in the assessment of firms.

 

Accordingly, sustainability accounting and reporting is not only on the horizon as an upcoming mandate for businesses in the United States, but it also seems to be in alignment with the priorities of millennials who are next generation of accounting professionals.

 

Janice Nunziato, a senior accounting major at Mount Saint Mary College, recently completed an independent study on the topic of sustainability accounting and chose certain businesses as case studies for her analysis. She was selected to present her findings to the college community at a recent research event. It is our hope that her insights may also be interesting to the professional accounting community.

 

When Janice first began her research, the first task at hand was to understand what was meant by “sustainability accounting” and what the term encompassed. It is interesting to note that when the topic is searched, “sustainability” is often presented as the definition of sustainability accounting, which does not clarify the topic. It quickly becomes apparent that the topic is still emerging on the American horizon.

 

Although there is a global trend and many countries require SAR, there has yet to be such a mandate in the United States. Perhaps a concise explanation is that sustainability accounting and reporting allows companies to present qualitative, as well as quantitative, data about the management of the environment, social and human capital, and the priorities of corporate governance. This information provides information for investors, creditors and management that can be used to fairly assess the performance of a firm.

 

Case Study

Perry’s Ice Cream, which has one of the two largest ice cream manufacturing plants in New York State, voluntarily complies with sustainability reporting; it even employs a full-time director of sustainability and provides the following objective: “Our journey to a more sustainable future is focused around key sustainable challenges identified for their potential impact across all aspects of sustainability: people, planet and performance. By proactively managing our waste, acting responsibly with our natural resources and engaging our team members in sustainable thinking and actions, we will continue to thrive.”

 

By using a “case study” like Perry’s Ice Cream, Janice and her fellow students got a look at the added value that sustainability reporting may bring. For instance, among other sustainability data, Perry’s webpage and 2015 Sustainability Report presents details regarding:

 

1. Cultural and Partnerships

  • Team: How their workforce is valued and they strive for creativity and innovation.
  • Community: They participate in fundraising events and reward volunteer efforts.
  • Safety: They strive for an environment of safety awareness and responsibility.

 

2. Environment

  • Waste streams: reducing impact on landfills by reducing materials entering facility, repurposing byproducts and dairy waste, and recycling.
  • Water: Striving to efficiently manage water used in production and clean-up.
  • Electricity: Using electricity generated from renewable sources.
  • Fuel: Reducing diesel fuel.

 

3. Grow and protect: To responsibly promote profit and growth.

 

4. Process and systems improvement: How the company plans to reduce waste and increase operational effectiveness.

 

Millennials

Janice believes sustainability accounting and reporting is an important area for future CPAs to be familiar with because more people, especially younger millennial professionals, want to see the qualitative value that businesses add:

  • Companies should be responsible for more than just financial data reporting; they should be vested in their communities.
  • Millennials want to be loyal to a company “that cares” because they are concerned about the environment and other social issues.
  • Millennials “connect” with companies that can provide qualitative data in addition to quantitative data; the sustainability data provides a “personal” connection.
  • A priority for younger professionals is to work for a company that is environmentally friendly with a commitment to enhancing the quality of life for employees. Many millennials would sacrifice income for family.

 

Thus, not only will sustainability accounting benefit potential creditors and investors, but the values projected in being socially responsible are crucial to be in harmony with the millennial workforce. Perhaps in the past, people lived to work, whereas millennials work to live and make family and leisure time a higher priority.

 

Companies may even need to be more open-minded regarding allowing employees to have the flexibility to work at home as part of their commitment to employee welfare; for millennials, productivity does not necessarily equate to visibility in the workplace. Younger professionals are “tech savvy” and can accomplish tasks without sitting in an office cubicle. To be productive companies must be aware of the changing workforce; embracing sustainability practices is crucial.

The mandate for sustainability accounting and reporting is clearly on the horizon for publicly traded companies in the United States. Although it may require a financial investment for firms to implement and report socially responsible practices, the benefits will, no doubt, far outweigh the costs. Socially responsible practices are a priority for millennials and reflect the demands of our evolving society.

 

Tracey J. Niemotko

Tracey J. Niemotko, JD, CPA, CFE, is a professor of accounting and chair of the School of Business at Mount Saint Mary College in Newburgh, N.Y.

 

IRS awards to whistleblowers grew last year

Michael Cohn

 

The Internal Revenue Service’s Whistleblower Office ramped up the number of monetary awards it gave to tax tipsters last year, according to a new report.

 

In fiscal year 2016, the Whistleblower Office made 418 awards to whistleblowers, a total of more than $61 million, representing a 322 percent increase compared to the 99 total awards paid in FY 2015. In addition, whistleblower claims assigned in FY 2016 were up 6.4 percent from those submitted in FY 2015, while closures of whistleblower cases increased 99 percent, according to the Whistleblower Office’s 2016 Annual Report to Congress.

However, even though the number of awards increased sharply, the total amount in dollar terms declined from the previous year, from $103 million in fiscal year 2015 to $61 million in FY 2016. Still, that represented an improvement over the $52 million awarded in FY 2014.

 

This is the tenth year since Congress passed legislation formally created the office that oversees the whistleblower program. “Whistleblowers have helped the IRS detect and deter tax noncompliance and avoidance, helping to protect both the nation’s revenue collection and the integrity of our voluntary compliance tax system,” wrote IRS Whistleblower Office director Lee D. Martin in the report. “Indeed, since 2007, information submitted by whistleblowers has assisted the IRS in collecting $3.4 billion in revenue, and, in turn, the IRS has approved more than $465 million in monetary awards to whistleblowers.”

 

He noted that his office has succeeded in all but eliminating a backlog of whistleblower claims over the past year, in response to recommendations from the Government Accountability Office and the Treasury Inspector General for Tax Administration. The office has also put in place a more streamlined process to avoid future backlogs.

 

“The whistleblower office is more welcoming to whistleblowers all the time, and the American public benefits as a result,” said Sen. Chuck Grassley, R-Iowa, in a statement Thursday. Grassley wrote the provisions in a 2006 law improving the incentives for whistleblowers to come forward and report large-dollar tax fraud. “Whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud,” he noted. “Cracking down on big-dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe. Still, the IRS and Congress can’t rest on our laurels. The IRS still is not as fast it could be in considering whistleblower information. Whistleblowers often have put their livelihoods on the line to come forward, and they deserve timely answers from the IRS. Another challenge is making sure the IRS interprets the whistleblower statute in a favorable light toward whistleblowers, which it doesn’t always do. I look forward to working with the new administration on whistleblower concerns. As I mentioned to Treasury secretary nominee Steven Mnuchin during our meeting, it’s required a lot of oversight to maintain the momentum at the IRS whistleblower office, and I’d like to see a Treasury secretary who will build on the progress.”

 

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

 

 

 

Corporate tax reform may prove harder than Republicans expect

 

Legislating can be so much more challenging than it seems during an election campaign. That's becoming increasingly clear about Republican promises to repeal and replace Obamacare. And it's about to become clearer on corporate tax reform.

Tax reform is a relatively easy concept: Most people favor lowering the tax rate and closing loopholes. The difficulty is in the details.

 

Consider the proposal now before the House of Representatives. It includes a reduction in the corporate tax rate; a one-time lower tax on profits accumulated abroad; an end to the tax deductibility of interest expense, coupled with immediate expensing of investments; and a border-adjustment system that would impose the corporate tax on imports but not exports.

 

The plan has several potentially desirable attributes. It would, for example, effectively eliminate the incentive for companies to shift profits abroad. However, the plan as a whole also has little chance of being enacted into law. Here's why not.

 

The first two components of the House plan are popular and are likely to be enacted in some form: a cut in the corporate rate and a reduced one-time tax on profits accumulated abroad. The latter will likely take the form of “deemed repatriation,” in which the tax is imposed on foreign profits to date, regardless of whether they are repatriated to the U.S. Then any subsequent repatriations of those funds would be free of tax. Among the details that need to be worked out are the tax rate (probably 7-15 percent), whether the tax can be paid over time or must be paid all at once, and how to treat foreign taxes already paid. Such details are the bread and butter of legislative negotiations.

 

What's much harder is changing the current Tax Code with regard to interest payments and introducing a border adjustment. And as those details are examined, we are likely to see the plan shift away from broad, comprehensive tax reform to a much more targeted scheme.

 

Economists and tax scholars have long disparaged the tax deductibility of interest expense, because it leads companies to use debt rather than equity to finance their activities. If one were designing a new tax system from scratch, a decent argument could be made that debt and equity should be treated similarly. The problem is that lawmakers are not designing the system from scratch. The U.S. nonfinancial corporate sector has more than $8 trillion in debt outstanding, debt that was taken on under the assumption that the interest would be tax-deductible. Multiple business models are based in part on that provision. So removing the tax deductibility at this point would wreak varying degrees of havoc on indebted firms, real estate investment trusts, the private equity sector, and many other companies. Whether or not you think it worthwhile to wreak such havoc, legislation producing it would likely be challenging to enact.

 

The same principle applies to the border-adjustment system. Economists and tax scholars generally favor tax structures, like the border-adjustment one, that eliminate incentives for companies to use transfer pricing techniques to shift profits overseas. In the current system, for example, companies have an incentive to reduce U.S. profits by inflating the price paid to a foreign subsidiary, and this practice is very hard to police. Under the border-adjustment structure, the incentive would disappear, because the tax imposed on the import from the foreign subsidiary would offset any benefit.

 

Proponents of the border-adjustment system also argue that any burden the tax imposed on importers would be mostly or entirely offset by an appreciation of the exchange rate, which would reduce the pre-tax cost of the imports. But to many retailers who rely on imports, that offset seems quite theoretical, and they are already ramping up to fight the legislation. It's also unclear whether the border adjustment would comply with World Trade Organization rules. But domestic opposition is likely stop this proposal before it gets as far any international panel.

 

Vague predictions are of little use. So let me make a specific one: Deemed repatriation will be enacted this year, but at the end of 2017, interest on corporate debt will still be a deductible expense and the corporate income tax rate will not be imposed on imports.

 

Peter R. Orszag is a vice chairman of investment banking at Lazard Freres & Co., and previously served as director of the Office of Management and Budget and director of the Congressional Budget Office.

 

 

 

Remote sellers should brace for surge of sales tax reporting laws

 

The new year will ring in a new chapter in the burgeoning battle over state remote sales taxation with a wave of new notice and reporting laws — but questions remain on how remote retailers can manage the potential legislative onslaught.

In the wake of the U.S. Supreme Court’s turning down an appeal challenging Colorado’s 2010 notice and reporting regime, many expect that states will regard the ruling as carte blanche to adopt similar statutes (Direct Mktg. Ass’n v. Brohl, 2016 BL 411370, U.S., No. 16-267, petition for certiorari denied Dec. 12, 2016).

 

The Colorado statute (Colo. Rev. Stat. Section 39-21-112.3.5) requires remote retailers not collecting sales tax to report in-state sales to the Department of Revenue and notify customers of their use tax obligations. The law remains under an injunction, and it remains unclear when state officials will seek to lift it.

 

In the meantime, remote sellers must contend with yet another state strategy to capture revenue lost to e-commerce. The Centennial State’s law was the first of its kind, and already became a model for a small contingent of states that have adopted reporting regimes.

 

More state lawmakers are expected to rally behind 2017 legislative proposals mirroring the Colorado measure, with Alabama, Kansas, Nebraska and Utah already announcing plans to push new laws.

 

And as a new patchwork of reporting rules unfurls, there are concerns that ambiguous requirements and multiple mandates will add to businesses’ administrative burdens — not to mention consumers.

 

Susan Haffield, a Minneapolis-based partner with Big Four firm PricewaterhouseCoopers LLP, said, “There is a lot of devil in the details, which, from my perspective, haven’t been ironed out with respect to these types of laws.”


More to follow leader

Even before the DMA denial, some states have recently jumped on the reporting regime bandwagon, including Oklahoma, which implemented its own consumer reporting measure that went into effect in November. Louisiana crafted a Colorado-style law, requiring both consumer notification and annual reporting to the revenue department, so long as the remote retailer generates more than $50,000 from annual in-state sales. The law goes into effect July 1.

H. 873 in part sets forth Vermont’s consumer notification requirements — but veered away from mandating disclosure to state tax authorities. However, while signed into law May 25, the notification mandate doesn’t take effect until the earlier of July 1, 2017, or the first day of the first quarter after Colorado implements its reporting regime.

 

“I don’t think it’s a big shock to anyone that most states are eager to slay this problem and when one state is successful, we all tend to copy that approach,” said Alabama Commissioner of Revenue Julie Magee. “I wouldn’t be surprised to see a version of a reporting bill in at least a half a dozen states or more in the coming months.”

 

During the MTC’s Executive Committee session, Magee announced Alabama's plans to push for a reporting regime like that of Colorado.

 

Meanwhile, many states continue to pursue different tax strategies for online retailers that may not incorporate reporting mandates. Virginia Gov. Terry McAuliffe announced plans to propose legislation imposing collection obligations on remote vendors with in-state warehouses or distribution centers. Other states are expected to advance regimes that set forth tax collection obligations based on a threshold of in-state sales, such as the economic nexus regimes that have triggered litigation in Alabama and South Dakota.


Has Colorado’s challenge concluded?

The path to the Supreme Court was paved by a commerce clause challenge to Colorado’s law. However, the dispute originated with several constitutional objections, including claims under the First Amendment and privacy rights.

Given that the U.S. Court of Appeals for the Tenth Circuit narrowly resolved only the Commerce Clause issues, the next steps for Colorado are unclear. An injunction enjoining enforcement of the reporting regime remains in effect, so the state could seek an order dissolving the injunction.

 

Robert Goulding, a communications specialist for the Colorado DOR, said, “We are aware of the decision and are evaluating our next steps for Colorado.”

The procedural uncertainty leaves many questioning when remote retailers must start complying with the notice and reporting requirements — not only in Colorado, but also in Vermont. Retailers might be obligated to abide by Vermont’s law before July 1 should Colorado move forward with its regime.


Complications with compliance

In the meantime, uncertainty remains over the specifics and scope of remote retailers’ obligations under these regimes.

 

For example, in addition to the annual reports, Colorado’s law requires remote retailers to provide customers with notifications of their potential use tax obligation at the time of each transaction. However, Haffield explained that there are questions regarding “what constitutes that notice and where should they put it.”

 

“Often, the communication with customers at the time of the transaction occurs only electronically,” she said. “Reprogramming that communication with the customer to provide that notice and how to do that, I think that’s going to be somewhat costly for remote sellers.”

 

Another consideration derives from gifts purchased in one state for delivery in another state, leaving open the question of whether remote sellers should report to the purchase state or the delivery state — or perhaps neither.

 

“More than anything, even if a state has rules, is being able to configure your reporting system to take into account when you’re supposed to report and when you’re not,” Haffield said.


Prepping for patchwork

As more reporting statutes and regulations surface in states, the absence of a uniform standard could complicate retailer compliance.

 

“There’s no template of what this law is,” said Matthew Walsh, vice president of tax for Sovos Compliance. Discrete provisions among state laws — defining the data required, reporting format and delivery mode — could require retailers to generate a separate report for every jurisdiction.

 

While third-party software can facilitate compliance, retailers will need to consider the state-specific requirements and whether their internal systems are equipped to collect and provide the requisite data.

 

Walsh said the ease of reporting will depend on several factors, including, “What’s the system currently doing for the seller? What kind of data do they have? What kind of data do they need to capture? If they need to bolster that, can they easily? And then, how easy will it be to extract that needed data back to the government?”


Retailer resistance

However, some retailers aren’t embracing reporting regimes without a fight. Critics of the Colorado law have expressed disappointment with the Supreme Court’s decision not to hear the so-called tattletale reporting case — and are calling on Congress to intervene.

“Remote sellers must make their voices heard,” said Hamilton Davison, president and executive director of the American Catalog Mailers Association, in a Dec. 12 statement after the DMA denial. “They should let policymakers at the federal and state level know that laws like these put an unfair burden on businesses and put personal privacy at risk while bringing government into the home and family.”

 

Consumer trust in catalog and e-commerce merchants is undermined “by requiring remote sellers to report to state tax collectors on the buying habits of their customers, including health care products, apparel or other sensitive items,” he added.


Losing digital dollars

On the other hand, a modern marketplace increasingly defined by e-commerce continues to take a toll on states’ sales tax bases.

 

Constraints on taxing authority over remote retailers derive from the Supreme Court’s 1992 decision, Quill Corp. v. North Dakota, 504 U.S. 298, which permits states to impose sales and use tax obligations on only those vendors with an in-state physical presence. However, many consider this an antiquated, pre-Amazon standard that didn’t contemplate digital commerce.

 

Efforts to capture online tax dollars have included affiliate and click-through regimes, and more recently, economic nexus thresholds. Notice and reporting mandates are just another arrow in cash-strapped states’ quivers.

 

Magee explained that research recently presented by Joe Garrett, Alabama’s deputy co-commissioner of revenue, spotlights a tax system unable to keep up with the modern economy, showing: 

  • Only one-third of the economy is taxed with sales tax, whereas it was once two-thirds of the economy.
  • In the 1960s, Alabama collected $2 of sales tax for every $1 of income tax. The state now collects 66 cents for every $1 of income tax.

 

“Because of this, change is inevitable and unstoppable,” Magee said. “How else will we fund essential government services?”


Calming consumers

As states and remote sellers start navigating the new laws, consumers likewise will be attempting to make heads or tails of their obligations.

 

Where out-of-state sellers have disseminated consumer notifications in select states, Haffield explained that some remote sellers released the notifications in staggered batches to manage the increased volume of customer calls. States, too, will see an uptick of calls from concerned citizens questioning whether they have to pay tax on transactions and how they should pay the tax.

 

Haffield noted that it is an open-ended question whether remote sellers must report transactions that aren’t taxable under state laws — so that consumers may find themselves in a position where they are determining whether the transactions are taxable.

 

Difficulties will increase “without a strong education program by each of the states to tell its citizens what to do when receiving these notices,” she said. “The educational efforts that I think will be needed may make it more difficult for the states and remote sellers than just collecting the tax itself.”


Compelling collection?

While the notice and reporting regimes are cast as non-tax laws, many suggest they encourage retailers to collect and remit instead.

 

“When you look at the cost benefit of the use tax reporting, for the states, I think if they enact the law, their hope will be that more retailers would rather collect the tax and they’ll pick up retail sales tax collection versus a lot of tax reporting,” Haffield said, noting that states likely don’t have sufficient resources to process all use tax information.

 

However, “there will be a lot of sellers who don’t do that,” she added. “And I think states are going to have to have some kind of a system in place to deal with the law if they do enact them.”

 

For remote retailers, software companies like Sovos Compliance offer a platform to navigate varying state tax bases and rates — and generally provide different technology catering to different types of businesses. For example, Amazon-size companies likely have needs distinct from smaller merchants. Or industries dealing in complex products, such as pharmaceuticals, may require a specific level of software sophistication.

 

“They should all do the same, they should all calculate the taxes and product taxability at the location where that product’s being sold,” Walsh said. “But there are some products that have been designed to support larger enterprises, so their software might have more complex functions than a smaller business would need.”


Small sellers’ disadvantage

However, expenses and personnel demands may deter smaller vendors from investing in a software platform for tax collection.

 

Everett E. Gallagher Jr., senior vice president and treasurer for Abercrombie & Fitch Co., said that the company collects tax on all online purchases in every state — and has done so for years.

 

The company uses the Vertex Indirect Tax O Series, which required an initial investment of money and time to configure the technology and set up the interface between Abercrombie & Fitch’s internal system and the Vertex system. And although sales tax compliance is predominantly software-supported, Gallagher explained that fiscal and IT resources are required to keep pace with software upgrades and sustain the systems’ interface.

 

“I feel bad for the small mom-and-pop shops,” Gallagher said. “Because if you’re doing limited sales, trying to put those systems in and incur the costs, that becomes an administrative burden.”

 

Jennifer McLoughlin covers state and local tax issues in all 50 states and the District of Columbia for Bloomberg BNA.

 

 

 

Better Business Bureau warns of QuickBooks phishing scam

Michael Cohn

 

The Better Business Bureau Northwest is sounding the alarm about a new email phishing scam targeting users of Intuit’s QuickBooks accounting software.

 

Victims receive an email in their inbox with the subject line, “QuickBooks Support: Change Request.” The email claims to be a confirmation from Intuit that a business has changed its name and contains a hyperlink that the recipient can click on to cancel the request. However, if email recipients click on the link, it directs them to a site that downloads malware to their device, according to a statement from the Better Business Bureau Northwest warning about the scheme. The malware allows criminals to capture passwords and other personal information from a device.

 

Phishing emails survey chart

 

The BBB Northwest is advising businesses not to click on such links. They should check the reply email address in such messages and “hover” their cursor over a suspicious-looking link to see where it leads before clicking to make sure it’s going to the correct Web domain instead of one with a similar-sounding name. They should also consider how a company normally contacts them and whether this is an unusual request.

 

"Unfortunately, phishing scams are commonplace today and not unique to Intuit," a spokesperson for the software vendor said. "While we have not received any complaints from customers about this scam, we encourage customers to visit our Web site, https://security.intuit.com, to learn how to protect themselves against scams." The company urged users to report suspicious-looking e-mails to spoof@intuit.com.

 

Phishing emails can be skilfully constructed to impersonate a company, including using the actual corporate logo. Businesses should have processes in place to make sure employees don’t click on links in unexpected emails and know who to ask about what to do before they click.

 

Tax practitioners have also fallen victims to phishing schemes, and the Internal Revenue Service has periodically sent out warnings about the latest variations on the scams. Fraudsters sometimes purport to be emailing from the IRS or tax software companies to lure victims into divulging passwords or sensitive financial information.

 

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

 

 

 

Fee for a 1040 averages $176: NSA

 

The average fee for a professional to prepare and submit a 1040 and state return with no itemized deductions is $176, the average fee for an itemized 1040 with Schedule A and a state tax return is $273, and the average fee for an itemized 1040 with Schedule C and a state tax return is $457, according to a biennial survey from the National Society of Accountants.

 

A 1040 and state return alone cost an average of $17 less two years ago, or $159, when the NSA last conducted this survey, but a 1040 with a Schedule A and a state return cost the same -- $273. (See “Average tax prep fee inches up to $273.”)

 

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The tax and accounting professionals surveyed are owners, principals, and partners of local tax and accounting practices with an average 28 years of experience.

 

The survey covered the average fees charge for a number of other forms, including:

  • $184 for a 1040 Schedule C;
  • $124 for Schedule D;
  • $135 for Schedule E;
  • $656 for a 1065;
  • $826 for an 1120;
  • $733 for a 990;
  • $282 for a 3115;
  • $59 for an 8962;
  • $53 for an 8965;
  • $58 for a 1095‐A; and,
  • $57 for a shared responsibility payment valculation.

 

Fees vary by region, firm size, population, and economic strength of an area.

 

The average tax preparation fee for an itemized 1040 with Schedule A and a state return range from highs of $333 in New England and $329 in the Pacific states to a low of $210 in Alabama, Kentucky, Mississippi and Tennessee.

 

All fees assume a taxpayer has gathered and organized all necessary information: Near three out of four (71 percent) of preparers charge an average fee of $117 for dealing with disorganized or incomplete files.

 

Most tax and accounting firms also report they have seen no increase in the number of IRS audits during the past two years. The average fee for an IRS audit response letter is $128 and the average hourly fee for an in-person IRS audit is $150.

 

“Most tax and accounting firms offer prospective clients a free consultation, which is worth about $150 based on the average hourly fees of tax preparers,” added NSA executive vice president John Ams, in a statement.

 

Jeff Stimpson is a veteran freelance journalist who previously served as editor of The Practical Accountant.

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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